Recent Posts:

Investors in Hillshire Brands (HSH) have to be happy that Tyson (TSN) made its own bid.

After all, it pushed HSH stock up by another 15% at Thursday’s open … and it turned Pilgrim’s Pride’s (PPC) early play for the company behind Ball Park franks and Chef Pierre pies into an all-out food fight.

And if that weren’t messy enough, Hillshire Brands is trying to purchase Pinnacle Foods (PF), which agreed to a deal for $4.23 billion with a breakup fee of $163 million before Pilgrim’s Pride swooped in with its offer for Hillshire Brands.

Needless to say, Hillshire Brands’ plans for the Pinnacle Foods acquisition has been sidetracked by the offers from Pilgrim’s Pride and Tyson.

And the bids are substantial. Tyson Foods made a hostile bid of $50 per share of HSH stock, or about $6.2 billion total, topping the unsolicited bid from PPC of $45 a share, or roughly $5.58 billion.

TSN wants Hillshire Brands for the same reason that Pilgrim’s Pride wants it: It’s hard to generate reliable profits in the chicken business. There’s little room for cost cuts, since feed and energy expenses are largely out of Tyson and Pilgrim’s control. (They can’t fire the chickens.) Raising prices is risky, since it pushes consumers to competitors or other kinds of meat.

The bottom line is that its very hard to defend margins in the business.

Hillshire Brands Can’t Lose

The acquisition of Hillshire Brands would diversify TSN or PPC away from serving up protein and get the winner into many more aisles at the supermarket. The distribution system is already up and running, so throwing Jimmy Dean sausages into the same truck as, say, Tyson chicken offers real synergies.

The same goes for Hillshire’s bid for Pinnacle Foods. The distribution is already there, and HSH would benefit with the addition of brands such as Duncan Hines cake mix and Log Cabin syrup.

Hillshire Brands was reviewing the offer from Pilgrim’s Pride before TSN jumped into the mix. Whether Pilgrim’s raises its offer for HSH stock remains to be seen.

Either way, with three deals in play all worth around $6 billion, the stakes are pretty high for a lot of stocks: TSN, HSH, PPC and even PF.

Thanks to this fight, anyone holding Hillshire Brands should get paid regardless of who wins the auction. HSH stock has leaped to nearly $52 a share from levels around $36 before PPC made an offer. All told, Hillshire is up 55% year-to-date.

Pretty nice for a slow-growth packaged food company.

Less happy are the folks holding PF stock, which is up a decent 10% so far this year, but can’t go ballistic with Hillshire Brands offer thrown into uncertainty.

Bottom Line

Longer-term, however, every investor in this sector looks to do well, and they should hold on no matter what the outcome. Industry consolidation is starting to snow ball, which bodes well for every player’s stock price.

It doesn’t matter who ultimately gobbles up HSH stock or Pinnacle Foods — they’ll both get scooped up eventually.

The M&A train is rolling, and that should support higher stock prices for all sector names until all the deals are done.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.